What is a payment gateway and how does it work?

What is a payment gateway?

Payment gateways are the technologies used by merchants both in physical stores and online to accept debit or credit card payment from customers.

As a small business owner using ecommerce platforms it's vital to choose the right payment service provider so you can facilitate safe online transactions for your customers. Find out more about why they’re necessary in our five reasons to use online payment gateways.

How payment gateways work

Using payment gateway services on your ecommerce site can help to facilitate secure and safe online transactions so you have one less thing to worry about. So how do payment gateways work?

1. At checkout, the customer puts in their credit or debit card information.
2. The payment page is either operated by the payment gateway itself or the input sections are encrypted to ensure the data is securely transported to the payment gateway.
3. The payment gateway encrypts the card details, conducts fraud checks, and then transmits both the cardholder’s information and transaction details to the merchant’s acquiring bank.
4. The acquiring bank forwards this information to the relevant card scheme, e.g. Visa or Mastercard, which then forwards it to the issuing bank. Another fraud check is conducted by the bank and the payment is either approved or declined based on the outcome of these checks.
5. The authorisation decision is communicated back to the payment gateway which informs both the customer and the merchant whether the payment has been accepted or declined.
6. Depending on the issuing bank’s decision, the payment page will either confirm the payment or prompt the customer to attempt another payment method if the transaction has been declined.

How much does a payment gateway cost?

Payment gateways have the following costs:

1. A per transaction fee
2. A fraud management fee (this could be per transaction)
3. A fee for tokenising card details (to enable subscriptions or one-click type payments)
4. Monthly account fees
5. Set-up fees
6. Fees for strong customer authentication (SCA) / 3DS2

How much do payment gateways charge per transaction?

This will depend on the provider you choose. Alongside a combination of fees, some gateways might also charge a fraction of each purchase. For example, Stripe doesn’t charge a monthly fee but charges 1.2%-2.9% + 20p for each transaction.

Why are payment gateways so expensive?

Payment gateway providers protect themselves against fraudulent businesses using their services and online fraud through the fees they charge. This can be irritating as a legitimate, law-abiding payment gateway customer but it does mean you’re protected against online fraud.

Which payment gateway should I choose?

When deciding on a payment gateway you should take into consideration the needs of your business.

How many types of payment gateways are there?

There are three types of payment gateways to choose from:

1. Hosted
2. Self-hosted
3. API-hosted

Hosted payment gateways can simply be copied and pasted onto your ecommerce site and customers will be directed to another payment page (such as PayPal) to complete payment. This is advantageous for its simplicity and security; however, introducing another payment step can cause a drop off on payment completion rates.

Self-hosted payment gateways can give a little more control over the payment process and boost payment completions.

Instead of being redirected to a 3rd party site, your customer’s payment details are collected directly on your website, where they are encrypted and submitted to the 3rd party payment gateway for authorisation.

This will create a more seamless experience for your customer, and such technology can be installed onto your website fairly simply through a widget, plugin or using copy and pasted code. However, if any quirks on the payment gateway site occur you won’t be able to fix these yourself.

The third option is API-hosted gateways which are mainly suitable for big businesses with large sales figures as they enable the entire payment process to occur on their website and servers. Although this would give you more power over your customer’s entire payment experience, it will cost more as you’ll need to pay extra to ensure payments are secure.

Can you stack payment gateways?

Yes you can. Stacking payment gateways basically means allowing your customers more ways to pay. For example, alongside providing an option for customers to put in their card details you could stack this with another payment gateway that’s used on other sites like PayPal, Amazon Pay or Shopify to allow them to use their pre-saved details that they’ve used on other sites before.

This makes payment even easier for customers and could lead to more sales for you.

What should I consider when looking for a payment gateway?

Alongside the costs involved, you should also consider the following:

Multi-currency support

If you have international customers you’ll want to provide a payment gateway that can handle payments made in different currencies and from different countries. Keep an eye out for any fees involved in foreign currency transactions too.

Security and fraud checks

A lot of sensitive financial information is shared through online payments so make sure you keep your business and customers protected by choosing a payment gateway that is Level 1 PCI DSS compliant. Some gateways will provide additional means of fraud detection and screening tools which can add further protection.

Subscription payment gateways

If any of your products are subscription based, you’ll need to find a payment gateway that is equipped to deal with recurring payments, like GoCardless. Look for ones that can store customer details for future transactions, automatically charge them according to the subscription schedule, and offer retry options if a recurring payment fails for any reason.

International payment gateways

To make sure you can get international sales, choose a payment gateway that can use multiple languages so your international customers can follow the payment process smoothly and confidently.

Mobile payment support

Paying via mobile phone is quickly becoming a go-to way for our everyday shopping. Look out for payment gateways that support payments from phones and mobile devices to give your customers maximum flexibility and convenience.

Examples of payment gateways

Here’s a list of payment gateways that are amongst the most popular and reputable:

1. Square
2. Stripe
3. Braintree
4. GoCardless
5. PayPal
6. Worldpay
7. Adyen
8. Amazon
9. Shopify
10. Opayo

To choose the best payment gateways, consider which ones provide the functionality you need at the right cost.

For instance, Stripe is one of the most popular payment gateways in the UK and is fully customisable to seamlessly fit into your website. Want to get set up quickly? Square is a simple solution and can be used to take payments both on and offline, while Braintree accepts over 130 currencies so is worth checking out if you’re hoping to gain international customers.

Name recognition can go a long way to help customers feel secure when making their purchase (consider offering Amazon Pay or Shopify, for example). And remember you can always stack your payment gateways, too.

Payment gateways FAQs

How can a payment gateway benefit my business?

Payment gateways are a handy tool for small ecommerce business owners to be able to securely receive and manage payments. They can help to streamline the payment process, keep customers moving through the payment system with confidence, and result in higher levels of completed purchases.

Is PayPal a payment gateway?

Yes. PayPal provides both the services of a payment gateway and a payment processor. It allows customers and merchants to engage in safe online payments, and also offers a gateway service called Payflow.

Is Google Wallet a payment gateway?

No. Google Wallet is a way for customers to pay using their phone or device instead of carrying their physical cards with them or inputting their card details multiple times. Rather than functioning as a gateway itself, Google Wallet is a 'digital wallet’ that simplifies the use of payment gateways.

How can you track income from payment gateways?

Xero’s handy accounting software for ecommerce businesses can help you track your income from payment gateways. What’s more, if you decide to stack your payment gateways or have multiple streams of income, you can sync your payments from Squarespace, Shopify, Wix, Etsy and WooCommerce sales data with Xero, to stay ahead with your accounting.

Find out more about how to accept payments online, and check out our ecommerce hub for more help and inspiration.